Green microfinance has already been ascertained as being crucial for the safety and prosperity of the poor as well as the MFI,  and several characteristics of microfinance providers make them suitable for dealing with climate change (see image). Having discussed its importance, here are some tools and techniques that can help microfinance fight climate change.

Note: This article, along with the entry about how microfinance can deal with natural disasters, are sister posts.

Making Green Farming a Condition for Microloans

Farmers and other borrowers may be required to practice environmentally-friendly farming, even when working with non-renewable products,  such as prudent soil and water management, or planting of trees as wind breaks, in order to qualify for a discount on microloans, or a microloan itself. This is one of the two forms of green microloans; the second one is below.

Syngenta (Switzerland), Green Microfinance (USA), BRAC (Bangladesh)

Prudent Water Supply Management

Floods and droughts both harm the poor through waterborne disease, contaminated water supply, and crop failure. Microloans can be used to alter the situation in the following ways:

• Microloans, specifically for the purpose of constructing tube-wells, cab be offered. Examples of such microfinance providers include Grameen Bank (Bangladesh), and Nirdhan Utthan Bank (Nepal).
• Clients may be requested setup other structures to harvest rainwater, such as roof water tanks or ponds. SEWA, and Indian microfinance institutions, funds the construction of these structures.

Reducing Dependency on Natural Resources

The poor often survive on subsistence farming, or fishing, and sell any excess crop produce in nearby markets. This may place a lot of pressure on natural resources, and over time, the growth in population will exceed the growth or renewal of natural resources, as per the Malthusian Theory. This shortage can be avoided if MFIs enhance the skills of their clients and train them to rely on other sources of livelihood.

Offering Microloans to Suppliers or Buyers of Renewable Energy Sources

MFIs can lend directly to poor households so they can purchase renewable sources of energy (biogas stoves, solar cookers, solar power/energy panels, efficient cooking stoves) for cooking, lighting, charging mobile phones used for mobile banking, and so on. Alternatively, they can finance dealers/suppliers of renewable energy sources to expand their business and reach the poor. This allows MFIs to create a ‘synergy’ by intermediating between the markets of loans for livestock and poultry rearing and loans for biogas production, which processes manure. The importance of this type of loan has been explained in an earlier post.

Grameen Shakti (Bangladesh), Al Karama (Morocco), SKS (India), Approtech Asia (Philippines), ESAF (India), Fonkoze (Haiti)

An excerpt from Climate Change and Microfnance, By Asif Dowla, highlights the impact of these projects:

Grameen Shakti has already installed 150,000 solar home systems (SHS)…Estimates suggest that the SHS has reduced CO2 by 68,000 tons per year.

These reductions can be used in the carbon trading industry, as explained below.

Micro-Insurance Against Climate Change

Micro-insurance can offer insurance against climate-related uncertainties that affect farm output and harm the consumption patterns of poor households. Climate change can alter weather patterns unexpectedly, so too much or too little rain, for instance, can upset the farming cycles of poor farmers. Here’s an excerpt from a recent news release (by UPI – Insuring the world’s poor against climate change) about this topic:

…the company (opportunity International) designed policies based on weather indexes. If farmers lived within a 12-mile range of a weather station, they could buy a policy that would make payouts based on the amount of rain measured at that weather station. If too much or too little rain came during critical points in the growing season, insured farmers would get cash, usually within 10 days.

Microfinance and Carbon Trading

According to Encarta, “carbon trading (also known as cap and trade) is a system of credits that allows a company or country that reduces its carbon-dioxide emissions below a target level to sell the extra reduction as a ‘carbon credit’ to a company or country that has not met the target level.”

By engaging in ‘carbon offset projects’, MFIs can create units of carbon credits and sell them at a profit of up to $8 per ton of emission reduction. Offset projects at the microfinance level can be as complicated as the projects mentioned above (solar home systems, biogas stoves, etc.) or as simple as farmers planting trees or biomass on their land to capture carbon dioxide, or to convert into biofuels (more about this at John Weinstein’s Blog).

Carbon finance can deliver other benefits too:

• By monetizing green microfinance efforts, MFIs gain additional income, which can be used to cover operating costs and make microloans more affordable for the poor
• MFIs can ‘create products that would use future carbon credit as guarantees or collateral for obtaining micrloans for start-ups or expansion projects (Econergy International Corporation, 2006)
• MFIs can apply for subsidies or low-cost funding from development agencies operating in the $60 billion market.

MicroEnergy Credit Corporation (USA), Green Microfinance (USA), Grameen Shakti (Bangladesh), World Bank.

Resources and Further Reading:

Microfinance and Climate Change Adaptation (International Institute for Sustainable Development)

Climate Change and Microfinance (Grameen Foundation)

Microfinance and Climate Change: Threats and Opportunities (CGAP)

Opinion: Sustainable Environment & Role of Microfinance institutions

Microfinance Theory and Practice